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Oh Snap

“I hated every minute of training, but I said, ‘Don’t quit. Suffer now and live the rest of your life as a champion.’”

-Muhammad Ali


Winning is never easy.  It requires early mornings and working hard.  That is true regardless of what your field of competition.  It may be producing research, it may be investing, it may be athletics, and so on.


Last night I joined the men of Ivy League Football for a few cocktails post the dinner they hold every two years.  Now I’m going to admit it, I definitely would have preferred to continue to sleep in this morning (so, yes, perhaps I had too many cocktails), but the only type of winning I understand is that which requires getting up and grinding. So here I am.


As usual when I get up, I’m greeted by a few emails from my colleague Keith McCullough regarding the global macro news and data flow.  The most notable one this morning related to the Stoxx 50, which is the “blue chip” index for Europe. (Think Dow Jones with a few more names.)  His email simply stated, “The Stoxx 50 snapped.”


For those of you that have been subscribers for awhile, you know that the price of securities and indices in our model are critical to determining future outlook.  When something snaps, that is not a good thing for those investors that are long of that market.  So, yes, as it relates to Europe, oh snap indeed.


Should any of us be surprised that the blue chip European index has snapped this week? Well, not really given that the European Union leaders were all convening in Brussels and that T.V. cameras were omnipresent.  In fact, according to the news releases this morning, they actually pulled an all-nighter last night.  I was out late with the boys from the grid iron, but I certainly didn’t pull an all-nighter, so kudos to them.


That said, the fundamental problem with politicians getting too much air time is that it is usually not great for equity returns.  Or, really, any asset price returns.  The funny thing about policy and policy makers is that they actually do influence markets and sometimes to a greater degree than they realize.  The perfect recent example of this phenomenon is the Japanese Finance Minister, Taro Aso.


Mr. Aso has been quite explicit since coming into office that he believes Japan needs to devalue and create inflation.  That is obviously all fine and good, until the market corrects more than said policy maker hopes.  As it relates to Mr. Aso and the Yen, it seems that has happened this morning.  According to this Aso:


“It seems that the government's policies have fueled expectations and the yen weakened more than we intended in the move to around 90 from 78.”


Markets are funny critters, aren’t they? They often do more than we expect.  (And sometimes less for that matter.)


This morning, there is a fair amount of pin action. As Keith also highlighted this morning:


“Plenty of cracks in my country level TRADE and TREND signals (Equities) now – tops are processes, not pts:


1.   FX WAR – Draghi is now trying to do precisely the opposite of what helped Germany recover, jawbone the Euro back down; overlay the slope of German economic recovery w/ the Euro in the last 3 months and you will see the pt western academics don’t get – currency has a POSITIVE correlation to growth expectations.

2.   INDIA – India’s Sensex joins the KOSPI (and Italy, France, Spain, Brazil) as the latest Equity market to snap my immediate-term TRADE line of 19,839 support. In isolation, I wouldn’t bother w/ a signal like this – but when the big country indices start to pile up, I move. Took down our Global Equity asset allocation yesterday.


3.   10YR  - the long bond looks almost identical to the VIX on price/volume/volatility factors – both signaled their first higher-lows of the yr in the last 48hrs. The upside down of that now makes last week’s closing high for the 10yr of 2.01% immediate-term TRADE resistance. Brent Oil > $115 is a headwind to global growth. Period.”


Incidentally, if you are not on the Direct from KM email list, ping and let them know you want to be upgraded.


As for the points above, the most noteworthy callout from my seat is that the Indian equity market has also snapped.  When equity indices start to snap, it is time to reduce equity exposure. 


Despite some of these major indices snapping, not all is negative this morning.  In fact, China reported some solid economic data.  Specifically, Chinese trade data for January  beat expectations as exports rose +25% versus estimates of +17.5% and imports were up +28.8% versus estimates of +23.5%.  Those are darn good numbers, even if it is the year of the snake!


I’m going to cut it a little short this morning as I’m sure many of you are busy prepping for the snow storm.  As always, let us know if you need help with anything.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $115.78-118.03, $79.79-80.29, $1.33-1.35, 92.20-94.29, 1.92-2.01%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Oh Snap - Chart of the Day


Oh Snap - Virtual Portfolio


TODAY’S S&P 500 SET-UP – February 8, 2013

As we look at today's setup for the S&P 500, the range is 24 points or 1.15% downside to 1492 and 0.44% upside to 1516. 














  • YIELD CURVE: 1.69 from 1.71
  • VIX  closed at 13.5 1 day percent change of 0.67%

MACRO DATA POINTS (Bloomberg Estimates):

  • 6am: ECB announces 3-yr LTRO repayment
  • 8:30am: Trade Balance, Dec., est. -$46b (prior -$48.7b)
  • 10am: Wholesale Inventories, Dec., est. 0.4%  (prior 0.6%)
  • 11am: Fed to purchase $1b-$1.5b debt in 2017-2042 sector
  • 1pm: Baker Hughes rig count


    • Defense Dept. has ordered Army, Navy, Air Force, Marines to submit specific spending cuts they’ll make if across-the-board reductions take effect on March 1 under sequestration
    • CFTC holds closed meeting on surveillance matters. 10am
    • House Fin Svc Cmte holds hearing on FHA actuarial report, w/ Commissioner Carol Galante, 10am
    • Oral arguments at U.S. Court of Appeals for the Federal Circuit in Washington in CLS Bank Intl case that may clarify rules for when software is eligible for patent protection, 10am


  • Trade deficit in U.S. probably narrowed as exports climbed
  • EU leaders prepare for budget cuts in bow to Cameron’s demand for thrift
  • China’s exports and imports rose more than estiamted in Jan.
  • German exports climbed in Dec. to propel year to record $1.5t
  • Charter to buy Cablevision’s Optimum West for $1.63b
  • S&P may face lawsuits by more states, Connecticut’s Jepsen says
  • Peugeot takes $5.5b writedown as sagging auto market saps assets
  • Boeing seen forced to alter 787 battery after U.S. NTSB findings
  • McDonald’s Jan. global comp sales may fall 1.1%
  • Warner Music agrees to buy Coldplay label for $764m
  • N.Y,, New England prepare for blizzard; 2,000 flights canceled
  • State of the Union, G-20, Cisco, Grammys: Wk Ahead Feb. 9-16


    • Soufun (SFUN) 5:45am, $0.56
    • Carlisle (CSL) 6am, $0.78
    • Corporate Office Properties Trust (OFC) 6am, $0.48
    • Sirona Dental Systems (SIRO) 6:30am, $0.84
    • Laboratory of America Holdings (LH) 6:45am, $1.62
    • AOL (AOL) 7am, $0.53
    • Apollo Global Management (APO) 7am, $0.93
    • Buckeye Partners (BPL) 7am, $0.82
    • Entergy (ETR) 7am, $1.71
    • Moody’s (MCO) 7am, $0.71
    • CBOE Holdings (CBOE) 7:30am, $0.42
    • Louisiana-Pacific (LPX) 8am, $0.21
    • American Axle (AXL) 8am, $0.06
    • Beacon Roofing (BECN) 8am, $0.40
    • Brookfield Infrastructure (BIP) 8am, $0.32
    • TC Pipelines (TCP) 8am, $0.63
    • IGM Financial (IGM CN) 9:39am, C$0.73
    • Emera (EMA CN) 10:20am, C$0.41
    • Cameco (CCO CN) Post-Mkt, C$0.41


  • Arabica Coffee Premium Over Robusta Falls to Lowest Since 2009
  • Wheat Slump Seen Extending on Growth in Stockpiles: Commodities
  • Diesel Slumps in Europe as Output Capacity Soars: Energy Markets
  • Platinum Trades Near 16-Month High as Rally May Spur Selling
  • Brent Crude Advances to Nine-Month High, Boosts Premium to WTI
  • Copper Rises as Chinese Trade Tops Estimates and Car Sales Jump
  • Robusta Coffee Climbs to Four-Month High on Vietnam; Sugar Gains
  • Soybeans Head for Fifth Weekly Gain as U.S. Exports Cut Supplies
  • Brazil Prepares to Surprise Drillers This Time With Gas: Energy
  • TransCanada Says East Route Eases Oil Discount: Corporate Canada
  • Deutsche Bank Said to Fire 10 Traders as Banks Retrench
  • Chocolatier Petra Seen Targeted in Asia’s Deal Spree: Real M&A
  • Rebar Rises for Fourth Week as China’s Exports Beat Forecasts
  • Oil May Fall as Technical Tools Signal Pullback, Survey Shows



















The Hedgeye Macro Team





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The Macau Metro Monitor, February 8, 2013



MACAU FULLY-BOOKED Macau Daily Times, Macau Business

Gamblers booked into Macau resorts over the Lunar New Year can already count themselves lucky as accommodations are sold out, boosting revenue for operators.  Seventeen major casino hotels in the world’s biggest gambling hub were fully-booked for Feb. 12-14 for the weeklong Chinese holiday that begins on Feb. 10.  "Demand for hotel rooms is exceptionally strong with 100% occupancy," said Yoko Ku, a spokeswoman at Galaxy Entertainment. 


Total visitor arrivals from February 5 to February 7 reached over 316,000, up by 6.2% compared with the same period last year, according to the Tourist Office. Close to 246,000 of those visitors came from the mainland, an increase of 13%.


Last year during the Lunar New Year holidays, a five-star hotel room cost, on average, MOP2,400 (US$300) per night. This year, data submitted by the industry to the Tourist Office shows that the average room rate from February 11 to February 14 will stand at above MOP2,700.



MGM China CEO Grant Bowie says that stricter regulation on junket operators, as announced by the government earlier this week, would not have any impact on VIP gaming revenue.  On the contrary, Bowie says it will ensure gamblers’ safety.


Commenting on the report by The Times that Beijing planned to crack down on triad-linked junket operators in the mainland, Bowie said he believed that Macau’s gaming industry would continue to get all the necessary support from the central and local governments.



Sands China announced it would increase the salaries of its employees by 5% starting next month. Additionally, the company said it is paying a bonus on February 14 to its staff, as a result of the company’s strong financial performance in 2012.  The gaming operator has over 25,000 employees.



New Jersey regulators are set to reconsider a decision that had forced MGM to put its stake in an Atlantic City casino up for sale.  MGM planned Thursday to make a formal application for regulators to reconsider the Borgata investment.  The company planned to argue that the arrangement with Ms. Ho should be less troubling to regulators now because her influence and the size of her stake in the Macau business has decreased since the earlier investigation.

MGM is applying for licenses to build casinos in Maryland and Massachusetts and would like to remove a stain from its record ahead of those proceedings.  It also would like to retain its stake in the Borgata.



Boasting 500 hotel rooms, the US$1.2-billion (MOP9.6 billion) Solaire Manila Resorts will open its doors on March 16.  Solaire plans to add 300 more hotel rooms after two years, said Bloomberry, a listed firm controlled by Philippine port tycoon Enrique Razon.



This note was originally published at 8am on January 25, 2013 for Hedgeye subscribers.

"Most of the time ‘I don’t know’ is the right answer.”

-Wesleyan University Professor, 2008


It was nearing midnight and towards the end of a ten hour stint in a 4’ x 8’ freezer on a winter night in early 2008 that I realized I wasn’t going to be a career research doctor.   


At the time, I was a PhD candidate performing an RNA isolation as part of some larger work on DNA enzyme kinetics.  What that means exactly isn’t really important, but it takes a long time and the work flow requires that most of that time be spent inside a walk-in ice box. 


Tired, bored, and numb, I was thinking more about the puts I bought in NLY (REIT/Mortgage Investor) earlier in the day than on the final mix components for the experiment.  I ended up aliquoting (fancy science term for “added in”) way too much of the wrong substrate into the mix.  No take-backs or mulligans in experimental biochemistry - Game over, reset clock, 10 more hours of overnight freezer duty.  A short-time later I joined Hedgeye. 


Similar to probing the populous on their view of functional Enzyme Kinetics, I imagine that asking the average person how the U.S. calculates inflation conjures images of Good Will Hunting scenes, blackboard equations and chalk dust mathematical revelation.  


Reality, however, more often resembles a bearded, middle-aged Robin Williams than it does a svelte, young Matt Damon.   Consider the following question: 


“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”


That gem of a perfectly subjective question, asked as part of BLS’s monthly price survey process, drives the calculation of “owner’s equivalent rent” and singularly represents approximately one quarter of the index used to calculate CPI inflation in the United States.   


China reports official GDP numbers 5 minutes after the quarter ends, we have owner’s equivalent rent.  Next. 


Parsing the reality from the illusory in reported domestic labor market data and understanding the subtleties of the seasonal and other statistical adjustments presents its own unique challenges.   



‘Tis the Season(ality)


As we’ve highlighted previously, strong and quantifiable seasonal adjustments have had a meaningful impact on the temporal trend in reported economic and employment data over the last four years.  In short, the shock in the employment series in late 2008 – early 2009 which occurred alongside the peak acceleration in job loss during the Great Recession has been captured, not as a bona fide shock, but as a seasonal factor.   


The net effect of this statistical distortion is that seasonal adjustments act as a tailwind from September – February, then reverse to a headwind over the March-August period.  From a positive seasonal adjustment factor perspective, we’ve got about one month left. 


6-Handle - Wkly Claims



Sell in May & Go Away (Until September)


From a strategy perspective, the temporal pattern in market dynamics, despite being rather obvious to any market observer, hasn’t been insignificant. 


The annual déjà vu pattern in market prices, reported economic data and monetary policy announcements observable over the last 4 years isn’t particularly surprising when considering the reflexive interaction between the associated dynamics: 


reported economic data begins to inflect, market prices move higher, confidence and optimism measures begin to improve alongside stock prices and reported econ growth, the marginal bid moves from treasuries to equities as improving conditions pull expectations around a Fed exit timeline forward, equities benefit further while the reported data continues to confirm - until it doesn’t - and then the dynamics reverse, culminating with a new QE announcement in late Q3 just as the data and seasonal adjustments impacts hit trough. 


Compressed economic cycles and amplified market volatility at its statistically distorted and centrally planned best. 


6-Handle - SPX Deja Vu





As the domestic employment and housing data has continued to confirm our 1Q13 Macro Theme of #growthstabilizing, a risk management question we’ve been considering is the possibility of seeing a 6-handle in the unemployment rate in 2013.  With Bernanke offering an explicit employment target of 6.5% for a cessation in QE initiatives, a significant decline in unemployment over the NTM may augur higher yields as the bond market attempts to front-run a prospective Fed exit.  


A material, mean-reversion back-up in yields is of obvious import for asset allocation decisions and remains the principal candidate catalyst for a driving a large-scale rotation to equities.


Further, in so much as an end to money printing is dollar bullish, we could see a perpetuation of the USD Higher --> Energy/Commodities lower --> Real Earnings/Real Growth Higher dynamic we think needs to persist for sustainable real consumption growth.  A step function move lower in commodity prices would also be equity supportive from a rotation perspective.


In a recent analysis we framed up the variable dynamics and put some quant around the magnitude of change in the relevant unemployment rate drivers necessary to take unemployment below 7.0% over the NTM (email us if you’d like a copy of the note). 


In short, while we wouldn’t necessarily view a 6-handle on the unemployment rate by 2013 year-end as our baseline case, the reality of the math suggests that it wouldn’t take extraordinary improvement in the factors that drive the unemployment rate to take it below 7% over the NTM.


In terms of how we model unemployment, we effectively need to see 2 of the 3 input variables to trend favorably with respect to their impact on the unemployment rate.


For example, scenarios in which Employment Growth accelerates a reasonable 20bps (2Y basis) on average in 2013 and growth in the Civilian Non-institutional Population (CNP) declines linearly to the historical average over the NTM or the Labor Force Participation Rate (LFPR) continues to decline at the 3Y CAGR both result in a move to/below the 7% unemployment level in 4Q13. 


In the chart below we provide a timeline view of the 2013 Unemployment Rate under a selection of progressively favorable scenarios. If you’d like to observe the impact of your own growth and participation rate assumptions on the unemployment rate timeline you can link to the associated model here >> Unemployment Rate Variable Analysis_HEDGEYE


6-Handle - U.S. Unemployment Rate



Yesterday on CNBC Ray Dalio remarked that the question for investors now, as always, is how events will transpire relative to what the market has discounted.    


We continue to like our 1Q13 Macro themes of #growthstabilizing and #housingshammer.   Ultimately, however, Investment perspective remains wedded to last price. Now a hundred SPX points higher from where we first penned the #growstabilizing hashtag back in early December, the relevant risk management question is whether growth can organically and sustainably accelerate from here.


On my first day in the freezer in grad school, my professor offered the following piece of memorable advice with respect to evaluating one’s place within the program’s intellectual pecking order:   


“Regardless of what they say, nobody really knows anything.  Most of the time ‘I don’t know’ is the right answer”


Stay Tuned. 


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now, $1654-1679, $111.51-113.95, $3.65-3.71, $79.41-80.14, 1.32-1.34, 1.84-1.91%, and 1481-1502, respectively.


Christian B. Drake

Senior Analyst


6-Handle - vpp


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.